Investment Quiz: 20 Questions Part 3

Explanation
Sushi Company acquired 30,000 stock rights from Sashimi Company. Each right entitles the holder to acquire one share at P45. Sushi sold its rights at P5 per right, with a P10,000 commission. The gain from the sale of the rights can be calculated by subtracting the total cost of the rights from the total proceeds from the sale. The total cost of the rights is 30,000 rights x P5 per right = P150,000. The total proceeds from the sale is 30,000 rights x P5 per right - P10,000 commission = P140,000. Therefore, the gain from the sale of the rights is P140,000 - P150,000 = -P10,000. Since the gain is negative, it should be reported as a loss. Therefore, the correct answer is 40,000.

Explanation
Fork Company purchased 50,000 shares of Ovaltine Company for P3,600,000. On December 31, 2009, Fork received 50,000 stock rights from Ovaltine. Each right allows the holder to acquire one share for P85. The market price of Ovaltine's share was P100 before the rights were issued and P90 after the rights were issued. Fork sold its rights for P10 each. The gain from the sale of the rights can be calculated by subtracting the cost of the rights from the proceeds of the sale: (P10 - P0) * 50,000 = P500,000. However, since the market price of the share decreased after the rights were issued, the gain is reduced to (P90 - P85) * 50,000 = P250,000. Since Fork sold the rights for P10 each, the net gain is P250,000 - (P10 * 50,000) = P140,000.

Explanation
The cost recorded for each new share that Eve acquired by exercising the rights should be 114. This is because Eve was entitled to buy one new share for P90 cash and two of the rights. The market value of each right was P18, so the total value of the two rights is P36. Therefore, the total cost for each new share is P90 + P36 = P126. However, since each share had a market value of P132 ex-right, Eve's cost for each new share is P132 - P18 (the market value of the rights) = P114.

Explanation
To find the additional amount of money that needs to be invested, we can set up the equation:

(0.05 * 3000) + (0.08 * x) = 0.075 * 3000

Simplifying the equation, we get:

150 + 0.08x = 225

Subtracting 150 from both sides, we get:

0.08x = 75

Dividing both sides by 0.08, we get:

x = 937.5

Therefore, the additional amount of money that needs to be invested is $937.5. However, since the answer choices are given in increments of $1000, the closest option is $5000.

Explanation
To ensure that both accounts earn the same annual interest, a higher amount should be invested in the account with a lower interest rate. This is because the lower interest rate requires a larger principal amount to generate the same interest as the higher interest rate. Therefore, it is logical to invest more in the account with a 6% interest rate and less in the account with a 9% interest rate.

Explanation
In 2009, Three Kings Company received 60,000 rights to purchase Eastern shares at P80. Since five rights are required to purchase one share, Three Kings Company can purchase a total of 12,000 shares (60,000/5). The market value of each right is P4, so the total value of the rights is P240,000 (60,000 x P4). The share was selling ex-right at P96, so the total value of the 12,000 shares is P1,152,000 (12,000 x P96). To determine the stock rights exercised using the first-in, first-out method, we need to subtract the value of the rights from the total value of the shares: P1,152,000 - P240,000 = P912,000. Since Three Kings Company used the rights to purchase 9,000 additional shares, the amount to be debited to the investment account is P912,000/12,000 x 9,000 = P684,000. However, this is not one of the options provided. Therefore, the correct answer is 871,200.

Explanation
The balance in Kent's investment in Luther Company account at December 31, 2009 should be 6,600,000. This is because Kent purchased 20% of Luther Company's ordinary shares for P6,000,000. Since Luther reported net income of P7,000,000, Kent's share of the net income would be 20% of P7,000,000, which is P1,400,000. Kent would also receive 20% of the cash dividend paid by Luther, which is 20% of P4,000,000, or P800,000. Therefore, the total balance in Kent's investment in Luther Company account would be P6,600,000.

Explanation
Wayne Company bought 15% of Parrot Company's ordinary shares outstanding for P6,000,000 in 2008. Wayne accounts for this investment using the cost method. In 2009, Parrot Company's net income was P9,000,000 and no cash dividend was paid. According to the cost method, Wayne recognizes its share of Parrot's net income as income from the investment. Since Wayne owns 15% of Parrot, it should report 15% of Parrot's net income in its income statement. Therefore, Wayne should report P1,500,000 as income from this investment.

Explanation
In the given scenario, Tough Company acquired 10% of Complex Company's ordinary shares for P6,000,000. Tough appropriately accounts for this investment by the cost method. The dividend income is reported based on the ownership percentage. The dividend income is calculated by multiplying the ownership percentage (10%) with the cash dividend reported by Complex Company in 2009 (P1,800,000). Therefore, Easy Company should report dividend income of P160,000 in its income statement for the year ended December 31, 2009.

Explanation
The proper carrying value of Fatty's investment in David at December 31, 2009 is 8,080,000. This is because the investment was initially acquired for 8,000,000 and the excess of cost over book value, which is attributed to the undervalued depreciable asset, was not amortized or adjusted. Therefore, the carrying value remains the same as the initial cost of the investment.

Explanation
Bell Company paid P18,000,000 for a 25% interest in Base Company, which represents a 25% interest in the net assets of Base. The acquisition cost is equal to the book value of the net assets acquired. Since Bell has the ability to exercise significant influence over Base, it should report the investment in Base Company at the original cost of P18,000,000 plus its share of Base's net income (25% of P9,600,000), which is P2,400,000. Therefore, the correct answer is 18,650,000.

Explanation
Based on the information provided, Weller Company purchased 10% of Pea Company's outstanding ordinary shares for P4,000,000. Since Weller is the largest single shareholder in Pea and Weller's officers are a majority of Pea's board of directors, it indicates that Weller has significant influence over Pea. According to the equity method of accounting, when an investor has significant influence, the investment is initially recorded at cost and adjusted for the investor's share of the investee's net income or loss. In this case, Pea reported a net income of P5,000,000 for 2009. Therefore, Weller's investment in Pea should be adjusted by adding its share of the net income, which is 10% of P5,000,000, resulting in an investment value of P4,350,000.

Explanation
Dryer Company should report revenue of P800,000 from this investment for 2009. This is calculated by multiplying Dryer's share of Epson's net income (20% x P4,000,000 = P800,000). Since Dryer has a 20% ordinary share interest in Epson and can exercise significant influence over its operating and financial policies, it recognizes its share of Epson's net income as revenue.

Explanation
Dino Company purchased 30,000 shares of Mammoth Company's outstanding ordinary shares for P200 per share. Mammoth paid P400,000 in dividends to its ordinary shareholders. Mammoth's net income for the year was P1,200,000, earned evenly throughout the year. To calculate the income from this investment, we need to consider both the dividends received and the share of net income earned. The dividends received by Dino would be 30,000 shares * P200 per share = P6,000,000. The share of net income earned would be 30,000 shares / 100,000 shares * P1,200,000 = P360,000. Adding the dividends received and the share of net income earned gives us a total income from this investment of P6,000,000 + P360,000 = P360,000. Therefore, the correct answer is 180,000.

Explanation
Zen Company purchased 40% of Ying Company's outstanding ordinary shares for P10,000,000. Since Zen cannot attribute the excess cost of its investment in Ying over its equity in Ying's net assets to any particular factor, it implies that there is no identifiable intangible asset or goodwill. Therefore, Zen will account for its investment in Ying using the equity method. The maximum amount that can be included in Zen's 2009 income before tax to reflect its "equity in net income of Ying" is P5,000,000 (Ying's net income) multiplied by Zen's ownership percentage of 40%, which equals P2,000,000. However, since Zen cannot attribute the excess cost to any particular factor, the excess amount of P500,000 (P2,000,000 - P1,500,000) cannot be included in Zen's income. Hence, the maximum amount that can be included is P1,500,000.

Explanation
Ron Company purchased 40% of the outstanding ordinary shares of Kim Company for P6,400,000. The book value of the net assets of Kim Company at the time of purchase was P12,500,000. The difference between the purchase price and the book value was attributed to equipment and building with fair market values higher than their book values. The remaining useful life of the equipment and building was 4 years and 12 years respectively. During 2009, Kim Company reported net income of P5,000,000 and paid dividends of P2,500,000. Therefore, Ron Company's investment income for 2009 would be 40% of the net income of Kim Company, which is P2,000,000, minus 40% of the dividends received, which is P250,000. Hence, the investment income for 2009 would be P1,750,000.

Explanation
Ken Company purchased a 30% interest in Barbie Company for P2,500,000. Since Ken accounts for this investment using the equity method, the investment is initially recorded at cost. Therefore, Ken initially records an investment of P2,500,000.

Barbie's shareholders' equity was P5,000,000 on the date of purchase. Since Ken purchased a 30% interest, the proportionate share of Barbie's shareholders' equity that Ken should report as its investment is calculated as 30% of P5,000,000, which is P1,500,000.

Barbie's net income for 2009 was P1,000,000. Since Ken accounts for the investment using the equity method, Ken recognizes its share of Barbie's net income as an increase in its investment. Therefore, Ken's investment increases by P1,000,000.

Since Barbie paid no dividends, there are no changes to Ken's investment due to dividends.

The carrying amounts of Barbie's identifiable net assets approximate their fair values, except for land. The fair value of land exceeds its carrying amount by P2,000,000. Since Ken accounts for its investment using the equity method, it includes its share of the fair value adjustment in its investment. Therefore, Ken's investment increases by 30% of P2,000,000, which is P600,000.

To calculate the amount Ken should report as its investment in the associate on December 31, 2009, we add the initial investment (P2,500,000), share of net income (P1,000,000), and share of fair value adjustment (P600,000). The total is P4,100,000. However, since Ken purchased a 30% interest, the final amount Ken should report as its investment in the associate is 30% of P4,100,000, which is P1,230,000. Therefore, the correct answer is 2,800,000.

Explanation
The income reported from the investment in Adam can be calculated using the equity method. According to the equity method, the investor recognizes its share of the investee's net income. In this case, Seed Company bought 40% of Adam Company's outstanding shares, so it should recognize 40% of Adam's net income. Adam reported a net income of P1,200,000, so Seed should report 40% of P1,200,000, which is P480,000. However, since Seed only bought 40% of Adam's shares on January 1, 2009, it should only recognize its share of the net income for the period it held the investment. Therefore, Seed should report 40% of P1,200,000 for the year ended December 31, 2009, which is P420,000.

Explanation
Annie Company should report an income of 960,000 for 2009 as a result of the investment. This can be calculated by taking 20% of Duke Company's net income for the year, which is 5,000,000, and subtracting the dividend received from Duke Company, which is 2,000,000. Therefore, 20% of 5,000,000 is 1,000,000, and subtracting 2,000,000 from that gives a net income of 960,000 for Annie Company.